Single Stock Volatility and Volatility of the Stock Market

Bef

ore you begin to invest in stocks, you must understand that any single stock is volatile. Some are more volatile than others, but they are all volatile. Some stock prices go up sharply and and others go down just as fast, but in the middle is the routine fluctation of stock prices.

Risk can be spread out over a number of stocks. Even a portfolio of stocks of a wide variety of companies can fluctuate wildly. This is due to the inherent volatility of the stock market itself. You may experience large losses in the short term due to market volatility. The stock market annual returns can vary greatly from year to year. Don't worry about this because there is a bright side to all of this volatility talk.

Despite the short term volatility, stocks as a whole have had a great return over the long term when compared to other investments. Sometimes the stock market crashes, but it has always recovered and moved on to higher ground. If you had invested at all of the market peaks, you still will have a good return when compared with other asset classes. If you had invested at some market bottoms, you returns would be even greater.

The good news is: time is on your side. Longer your investment horizon the better your returns will be. If you pick the right stocks and hold for the long term, you will have a darn good chance of receiving a great return on your investment.

Historically stocks have outperformed most asset classes. That does not mean they will in the future. Stocks outperform most asset classes because investors own great companies that can create great economic value.(They make a lot of money). Stock investors demand a greater return because they take a greater risk. This is why they outperform most other asset classes. Would you have rather lent Microsoft money at 7% interest or would you have rather bought the stock? Buying the stock does expose you to greater risk and volatility, but the sky is the limit on the potential return.

The Financial Reality

While stocks make an attractive investment in the long run, stock returns are not for sure and tend to be very volatile in the short term. Therefore, it is in your best interest not to invest in stocks for the short term. To be effective (make money), you should only invest in stocks for the long term. And the longer you invest, the better your chances at making some for sure money.

Interest

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Moving Markets

Econonmic Indicators

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